Ashraf Laidi

Forced Liquidation or Improved Sentiment?

Recent intermittent bounces in EURUSD in the face of surging Eurozone spreads are said to be reflecting possible liquidation by European banks unloading US assets to relieve an ensuing shortage of US dollars. Other explanations were attributed to the IMF buying Irish and Portuguese bailout tranches during the late European trading hours, taking advantage of cheaper levels (lowest since Feb 15). But as long as traders find no confidence in battling the coordinated efforts of asset-buying central banks and the Fed produces no new dissenters to the ultra low rates til 2014 mantra, risk currencies may be assured to find support.

Spanish government bonds are now the latest victim of bond traders typical one-country assault amid speculation that Spain will be the 4th recipient of a Eurozone bailout. At a time of deepening recession, Spanish authorities have selected education and health sectors for 10 billion in budget cuts. Cuts in these sectors have yet to prove successful or sustainable the he Eurozone. Little surprise that the biggest yield gainers are of nations, which have not yet been bailed outSpain and Italy. Considering that Greece, Ireland and Portugal were each bailed out when their 10-year yields crossed the 7% level, we ought to watch Spanish yields, currently at 5.9%.

The chart below shows how zero purchases from the ECBs Securities Market Programme (SMP) was replaced by the LTRO-1/2 program and Greek Private Sector Initiative deal (PSI), all of which were effective in shorting up risk appetite and the euro at the expense of sovereign yields. Unless the ECB acts with the next dosage of stimulus (LTRO, SMP or swap operations with the Fed, EURUSD is most likely to finally break the $1.2950 floor.

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